PCAOB to Seek 6 Percent Budget Boost

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The Public Company Accounting Oversight Board will ask for a $144.6 million budget for 2008, a 6 percent increase over the amount the Securities and Exchange Commission approved last year. But not all the board members are comfortable with it.

The PCAOB’s budget is funded by the registration fees of publicly traded companies and the accounting firms that audit them, and prepared cooperatively by the audit firm overseer’s budgeting staff and the SEC staff.

During an open meeting on Monday, some of the PCAOB board members expressed reservations about approving the request for the 6 percent increase.

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Board member Charles Niemeier called the budget process “disturbing.” He said internal discussions and the external negotiations between the two regulators’ staffs did not include sufficient mechanisms for the board members to be involved. “I feel little choice but to ask for the amount proposed,” he said, adding that he hopes the process will be changed for future budgets.

Board members also are concerned that the $144.6 million budget will not give the nonprofit, nongovernmental organization enough wiggle room for hiring staff. The proposed 2008 budget projects that the PCAOB can hire up to 30 more employees than it had this year, for a total potential payroll of 507.

Similar to the finance staffing crunch felt at corporations and accounting firms, the PCAOB has been hard-pressed to fill its own staff with accounting talent. And according to board members, the latest budget could make it even tougher. “This is a tight budget,” said outgoing board member Kayla Gillan.

According to Gillan, for the first time the PCAOB could find itself in the position of having to turn away potential employees because it can’t afford them. In addition, she said, the PCAOB is putting itself at risk of having to ask for supplemental funding in the middle of next year if any of the variables in the PCAOB’s projections change, such as an unforeseen standard-setting project. For instance, the PCAOB’s workload over the past year focused on revising Auditing Standard No. 2, its internal-control guidance, under pressure from the SEC and corporate constituents.

Nonetheless, all five board members voted in favor of recommending the 2008 budget to the SEC. Its will be the sixth budget in the PCAOB’s short history since the enactment of the Sarbanes-Oxley Act, which mandated the creation of a board that would periodically inspect accounting firms.

Seventy percent of the PCAOB’s budget is allocated to personnel costs, and half of that is devoted to its inspection staff. That’s the one department that has come closest to meeting its hiring goals for 2007. The PCAOB expects 260 people to be working in that office by the end of next year. Still, Niemeier called that projection an unfair cap, considering that the board gave itself room to hire 282 inspectors for its 2006 budget.

Next year, the PCAOB will inspect the seven largest accounting firms, which are inspected annually, and 220 smaller domestic firms, which are reviewed every three years. This past year, the PCAOB inspected 180 firms.

Other PCAOB departments, such as IT and the Office of Research and Analysis (ORA), will receive less funding. ORA’s budget has been cut by more than $1 million, whereas IT will be allowed to spend up to $19 million, compared to the $23.3 million allocated for it last year. Niemeier expressed concern about a lack of resources in the IT department, particularly considering the departure earlier this year of the PCAOB’s chief information officer and some of its IT staff.

One department that will get more funding is the Office of the Chief Auditor, which is charged with the PCAOB’s standard-setting activities. The board’s top priorities for the next year include reevaluating auditors’ risk-assessment processes and reviewing its interim standards, which were taken from the American Institute of Certified Public Accountants when the PCAOB was created.

Ninety-five percent of the PCAOB’s funding came from publicly traded companies in 2006. The rest derived from mutual funds and investment companies.

For 2007, the board anticipates that $9 million of its $136.4 million budget will be left unspent, largely because it didn’t hire as many employees as projected last year.